The thing that dividend investors love more than anything else is a big increase in a stock's quarterly payments, and Seagate Technology (NASDAQ:STX) certainly delivered the goods with a huge dividend boost within the past week. Yet even though it's easy to fixate on a dividend increase, it's important also to recognize the confidence that Seagate has expressed by making such a large future commitment, especially given that no company ever likes to have to pull back on dividends once they've increased them. With its mix of traditional hard-disk drive products and innovative new cutting-edge storage solutions, Seagate is looking to grow not just now but well into the future. Let's take a closer look at two things every dividend investor should know about Seagate Technology.
1. Seagate's recent dividend increase was truly massive, showing just how solid the company's business has been recently.
For most dividend stocks, an annual payout boost typically involves a penny here and a penny there. Even the highest-quality dividend stocks usually take their time in growing their dividend, ensuring that any increases are sustainable rather than simply being a consequence of particularly strong economic conditions at that specific point in the business cycle. Dividend investors are therefore usually patient, counting on rising payouts over time to compensate them for their willingness to be long-term investors.
In that light, Seagate's 26% dividend increase Wednesday is a big departure from common practice. In one fell swoop, Seagate shareholders can expect to receive $0.54 per share every quarter, up from just $0.43 earlier in 2014. The company was careful to stress that the new amount is a "targeted" dividend amount, subject to unexpected financial bumps in the road that could cause Seagate's board of directors to reverse course.
In explaining the dividend increase, Seagate CEO Steve Luczo gave two different but powerful reasons underlying the decision. On one hand, Luczo argued that the increase "reflects the continued strength of our business and operations and our confidence in Seagate's ability to continue to generate sustainable operating cash flow." Given the success that the data-storage specialist has had in building its business, the company's confidence in its financial condition and its balance sheet seem quite warranted.
At the same time, though, Luczo also mentioned one-time factors that pushed the dividend even higher than it otherwise might have gone. As Luczo explained, "Seagate recently received approximately $800 million in connection with the arbitration award confirmed by the Minnesota Supreme Court, and the Board of Directors decided that a portion of these proceeds should be returned to our shareholders in the near-term, enabling us to increase the dividend by a larger percentage than in the past."
Overall, Seagate investors should be happy about the dividend increase. But they should also keep in mind that $800 million arbitration awards won't happen every year, and so next year's increase could be much smaller than what Seagate shareholders will receive starting in November.
2. Big buybacks have made it easier for Seagate to pay higher dividends.
Seagate has a broader capital allocation strategy than just paying dividends, and in some ways, the other methods Seagate has used to return capital to shareholders has had an even more dramatic impact on the stock. Since the beginning of 2012, Seagate has cut its outstanding share count by more than a quarter, and that has helped to produce huge share-price gains as metrics like earnings per share benefit from having fewer shares outstanding.
What many dividend investors don't realize is that when a company buys back stock, it reduces the amount of total cash it has to pay out in dividends. That can make it easier to boost quarterly per-share payouts. In Seagate's case, ample cash flow from its legacy hard-disk drive business, in which it shares a dominant position with rival Western Digital (NASDAQ:WDC), has only grown as a result of rising PC demand. Greater needs for cloud-related storage have also helped to finance dividend growth. But at the same time, Seagate has also seen high growth prospects from its solid-state drive business, and the company has the ability to use its brand recognition and loyalty to improve its market share in SSD sales. That combination of cash flow and growth give Seagate plenty of options for how to allocate capital going forward.
Overall, Seagate has ably demonstrated its commitment to shareholders with its dividend policy. Even though investors shouldn't get used to 25%-plus dividend increases every year, Seagate has a lot of potential to remain a strong dividend-growth stock in the future.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.